Support for pre-retirees needs urgent reform, says Rice Warner.
Financial services consultancy firm Rice Warner says that support from the superannuation industry for people approaching retirement needs urgent reform because it is “variable and sporadic”.
Analysis of the current state of the sector released yesterday said that while the industry does not want more change, the establishment of default retirement products and a simplified means of delivering financial advice are critical – and that the time to start is now.
“During the Federal Election, the Coalition promised not to make any changes to superannuation in the term of the new parliament, [but] … the industry still must deal with the Protecting Your Super Package and the enhanced requirements of APRA’s [Australian Prudential Regulation Authority] new Member Outcomes regime. Further, the Government will consider and, for the most part, implement the recommendations of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.”
Rice Warner says super funds’ “engagement and financial advice for these members is variable and sporadic” and that the path to retirement is clouded by the need for information and advice for members facing complex issues.
The firm is critical of some fund calculators that purport to indicate a member’s expected income in retirement, saying they should only be considered as a crude guideline. It says funds can add real value when members first start thinking about retirement.
“More than two-thirds of members will be married, so they also need to consider their combined financial situation and likely timing of their partner retiring. They should be told of the need to protect themselves against sequencing, longevity and investment risks – but are unlikely to be equipped to deal with these issues.
“Even a simple decision such as how much monthly benefit to draw is difficult as they cannot be sure how long their money will last. This will depend on unknown factors, including how long they live, how much they need to budget and what investment earnings they will receive in retirement.
“For many, the Age Pension will be the greater part of their retirement income and the rules around that are complex too, with an income and assets test, and a history of government changes in means testing rules.
“Members may want a lump sum at retirement to pay off debt or perhaps for home renovations or a holiday reward. Some members will continue working part-time to supplement their pension benefit, but they may be confused by the complexity around eligibility for the Age Pension, which affects most retirees.
“Clearly, members require guidance and it makes sense for their superannuation fund to provide this, particularly if they are delivering the required pension product.”
It says that uncertainty about the future causes many retirees to be conservative in their spending.
The graph above shows that most retirees draw modest amounts from their pension each year. The majority of those who have been retired for more than 10 years still draw no more than six per cent of their balance as pension payments.
“The Government hopes this frugality will be overcome by Comprehensive Income Products in Retirement (CIPRs), which are scheduled to be launched from July 2022. However, these products will be voluntary for members and we expect the take-up rate to be low if CIPRs are implemented in the form that is currently proposed.”
However, Rice Warner cautions that it would be dangerous for funds with a large proportion of their membership approaching retirement to wait for future products to be defined by the CIPR framework. It says funds must prioritise the building of retirement products and decision-making resources focused on outcomes for members.
Did you find it difficult to understand how your retirement would be financed in the preceding years? Did you seek advice from your super fund? Was it helpful?
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